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Calculate the Initial Investment for a Replacement Machine

Edwards Manufacturing Company is considering replacing one machine with another. The old machine was purchased 3 years ago for an installed cost of $10,000. The firm is depreciating the machine under MACRS, using 5-year recovery period. (See Table 3.2 on page 100 for the applicable depreciation percentage.) The new machine cost $24,000 and requires $2,000 in installation cost. The firm is subject to a 40% tax rate on both ordinary income and capital gains. In each of the following cases, calculate the initial investment for the replacement.

a. EMC sells the old machine for $11,000.
b. EMC sells the old machine for $7,000.
c. EMC sells the old machine for $2,900.
d. EMC sells the old machine for $1,500.

Solution Preview

a. EMC sells the old machine for $11,000. $18,248
b. EMC sells the old machine for $7,000. $16,648
c. EMC sells the old machine for $2,900. $15,008
d. EMC sells the old machine for $1,500. $14,448

a. b. c. d.

Selling price $11,000 $ 7,000 $ 2,900 $ 1,500
Cost ...

Solution Summary

This solution illustrates how to calculate the initial investment for a replacement machine.

$2.19